Jefferies shows fixed income isn’t for everyone

September 18, 2013

By Antony Currie
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Jefferies shows that fixed income isn’t necessarily for everyone. The revenue the U.S. investment bank generated from trading bonds, currencies and commodities slumped 85 percent, to just $33 million, in the three months to September. That’s a far bigger drop than its larger rivals across Wall Street are expecting. As a relative newcomer, Jefferies appears to be struggling with volatility. The same may prove true for others that are downsizing their FICC businesses.

Richard Handler, the chief executive of Jefferies, laid the blame for the meager showing on rising interest rates. Fair enough, but the quantum of the decline is still surprising. JPMorgan finance chief Marianne Lake and her Morgan Stanley counterpart Ruth Porat said at an investor conference last week that trading businesses are either flat or down just a few percentage points.

There was a similar discrepancy, if not as large, between Jefferies and most of the field last quarter. This could simply be a reflection of size and a relative lack of diversity. Jefferies, after all, bulked up in areas like interest-rate products and mortgage bonds, which have suffered more in recent months than corporate bonds, though Jefferies also trades those.

Jefferies is by no means the only shop threatened by such lopsided results in the future. UBS, for example, has dumped a number of asset classes from its FICC repertoire, even rebranding the unit “foreign exchange, rates and credit.” Credit Suisse, too, has narrowed its focus, though not as drastically. Trading revenue for both banks has been both lower and more varied in recent quarters than others.

Morgan Stanley, meanwhile, has stayed in most businesses but shrunk its balance sheet. Its FICC results have been relatively stable, after stripping out accounting and legacy asset issues, though below what executives would like. What’s more, the return on equity in large businesses like rates and commodities is only in the single digits.

All three have at least one advantage over Jefferies, though: their fixed-income trading desks account for a smaller proportion of overall revenue, meaning volatility should do less relative damage. That’s at least some comfort for what could become a bigger problem.

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